Sunday, November 25, 2012

Border Wars, Disputes and Other Global Considerations

Amid better than expected improvements in German business confidence (reported by the Ifo economic institute) and  Greek debt restructuring efforts moving forward, budget talks among 27 Eurozone leaders broke down on Friday.  European Central Bank President Mario Draghi said Eurozone leaders need "to follow up with determination on their commitment to make the institutional reforms needed to complete economic and monetary union", German Chancellor Angela Merkel said "we have reached a good basis to continue our work" and U.K. Prime Minister David Cameron said “the budget deal wasn't good enough for Britain, but it also wouldn't be good enough for a number of countries”.

Additionally, as many governments pursue financial restructuring, others confront geographic and political restructuring challenges. China recently issued passports presents maps of its boundaries extending into parts of India, Taiwan and areas of the South China Sea considered territories of the Philippines, Brunei, Malaysia and Vietnam. Today, in Catalonia, a region accounting for 20% of Spain’s economy, its citizens are considering political leaders that may lead the region toward a separation from Spain. In the Middle East, with a cease-fire in place between Hamas and Israel, Egyptian President Mohamed Morsi’s increased control over the country has triggered significant internal conflicts.  In the U.S., there is increased attention on petitions for secession by various states  - the largest effort from Texas with over 112,000 signatures (the White House will provide an “official response”  to petitions with over 25,000 names by mid-December).


MY TAKE

  • Regarding the Eurozone – with diverse economic and political interests among its 27 member countries, internal tensions will likely continue for months, if not years.
  • Regarding “border war and disputesChina’s remapping efforts present a challenge to several players in the region because of its significant position as an economic trading partner; in Catalonia, any successful actions toward separation from Spain may provide a roadmap for other Eurozone players to follow; in Egypt, President Morsi’s actions reinforce the view that political conflict is the norm within the region; in the U.S, the varied petitions highlight the divergent attitudes across the country and the challenges facing decision makers as they seek common ground to address the “fiscal cliff” and other economic challenges.

Sunday, November 18, 2012

A Cliff, a Storm, the Gates of Hell and a Wounded Brand

Last week, Middle East tensions increased as Israeli and Hamas leaders launched air strikes against each other. Hamas military leaders said Israel opened "the gates of hell on themselves" after a military leader was killed. Israeli Foreign Minister Avigdor Lieberman said, "Every time that Hamas fires there will be a more and more severe response.” Egyptian President Mohamed Morsi added, “I’m warning the aggressors against Gaza – they can’t have any power over the [Gaza] strip”. Today various players in the region are trying to arrange cease-fire talks.

In the U.S., the Federal Reserve reported that October industrial output unexpectedly declined 0.4% (a 0.2% increase was expected) and suggested that the impact of Superstorm Sandy contributed to the weak results. At a financial summit in Atlanta, Federal Reserve Chairman Ben Bernanke said, “that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery”. In addition, President Barack Obama and Congressional leaders met to discuss potential solutions to the “fiscal cliff” debt issues.


Finally, Hostess Brands (the maker of Twinkies and Wonder Bread) filed for bankruptcy and CEO Gregory Rayburn said the firm “will move promptly to lay off most of its 18,500 member workforce” along with closing 33 bakeries, more than 560 distribution centers and 570 bakery outlet stores.


MY TAKE

  • Regarding Middle East conflicts, while actions of political and military leaders may not align with the views of its citizens, last week’s actions reinforce concerns that persistent historical tensions may expand into broader regional conflicts.
  • Regarding the U.S., 1) Superstorm Sandy will drive a long-term rebuild and replacement cycle, but short term business disruption will have a negative economic impact, 2) improving bank lending dynamics will require more stable economic growth and 3) global market volatility may continue until Congress and the President reach an agreement for managing the “fiscal cliff”.  
  • Regarding Hostess, against a nostalgic backdrop, this is another bankruptcy resulting from 1) poor decisions by private equity firms, company management and unions and 2) changing consumer demand for its products. There is an obvious negative impact to the firm’s employees, as well as its production and distribution network partners, but some of its brands will likely attract new investors.

Sunday, November 11, 2012

Eurozone Issues and the Fiscal Cliff, Once Again the Focus

Many global markets responded positively when the U.S. Presidential election results were announced last week. However, a few hours later, markets swiftly turned negative when European Central Bank President Mario Draghi said, “Germany has so far been largely insulated from some of the difficulties elsewhere in the euro area. But the latest data suggest that these developments are now starting to affect the German economy”. In addition, when discussing issues in Greece and the Eurozone, German Finance Minister Wolfgang Schaeuble said "We are on the way to solving the problems step-by-step," but "on the other hand we have weaker growth in the global economy as a whole and that weighs on our ability to grapple with the euro crisis."

Also, with renewed focus on the U.S. Fiscal Cliff, President Barack Obama suggested that spending cuts and additional taxes from high-income Americans (including himself) were needed and said "that’s how we did it in the 1990s, when Bill Clinton was president …that’s how we can reduce the deficit while still making the investments we need to build a strong middle class and a strong economy. That’s the only way we can still afford to train our workers, or help our kids pay for college, or make sure that good jobs in clean energy or high-tech manufacturing don’t end up in countries like China....” In addition, House Speaker John Boehner said, "I'm proposing that we avert the fiscal cliff together in a manner that ensures that 2013 is finally the year that our government comes to grips with the major problems that are facing us."


MY TAKE

  • Regarding Eurozone issues - with persistent economic stress and continuing tensions among member countries, it is likely that the Eurozone of today will not be the Eurozone of tomorrow.
  • Regarding the U.S. Fiscal Cliff - with policy makers pursuing a mix of 1) “kicking the can down the road” tactics, 2) hardball decision-making and 3) general gamesmanship as the end-of year deadline approaches, global markets will be driven by the degree of confidence in their efforts. We should expect more volatility, and hopefully we do not encounter any unintended consequences

Sunday, November 4, 2012

In The Post "Sandy" Era, the Climate Change Debate Continues


Last week, the high winds, rains and tidal surges of super-storm Sandy affected millions of people living in the northeast coast of the U.S., as well as parts of Cuba, Haiti and Jamaica. As President Obama declared New Jersey and New York “major disaster” areas, climate change, a rarely discussed issue during this year’s political campaigns, became a high profile concern. Supporting commentary included: 
  • New York Governor Andrew Cuomo - “We have a new reality when it comes to these weather patterns; we have an old infrastructure, we have old systems. That is not a good combination and that is one of the lessons I will take from this, personally”, 
  • U.S. Senator Charles Schumer - "There are a group of people in Washington right now who just deny the truth …about what's going on in the atmosphere” and 
  • New York City Mayor Michael Bloomberg - “The floods and fires that swept through our city left a path of destruction that will require years of recovery and rebuilding work….In just 14 months, two hurricanes have forced us to evacuate neighborhoods -- something our city government had never done before. If this is a trend, it is simply not sustainable. Our climate is changing. And while the increase in extreme weather we have experienced in New York City and around the world may or may not be the result of it, the risk that it might be -- given this week’s devastation -- should compel all elected leaders to take immediate action.”
On Friday, the “Climate Security Report" published by the American Security Project (a nonpartisan think tank) said "The effects of climate change on infrastructure will not only be costly to our nation’s economy, they will also make us less secure as a nation," and Christine Todd Whitman, a board member, former New Jersey Governor and EPA Administrator said “Sandy is the second 100-year storm we've had in 14 months in this part of the country. … It tells you that something is changing.” Also note: last year the authors of the United Nations’ 2007 Intergovernmental Panel on Climate Change said that global sea levels could increase by least six feet by 2100, causing problems for many coastal cities (Mumbai, New York City, etc.).

MY TAKE
  • The economic impact of this disaster will take months or longer to assess, but the "Post Sandy" era will require replacements and upgrades to a broad set of infrastructures (transportation, power grids, etc.). 
  • The rebuilding process has the potential to 1) drive economic growth, 2) reduce the polarized nature of political discourse and 3) increase the focus on the effectiveness of government rather than the size of government.